Weekly Ratings, Targets, Forecast Changes – 31-05-24

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Weekly update on stockbroker recommendation, target price, and earnings forecast changes.

By Mark Woodruff

Guide:

The FNArena database tabulates the views of eight major Australian and international stockbrokers: Citi, Bell Potter, Macquarie, Morgan Stanley, Morgans, Ord Minnett, Shaw and Partners and UBS.

For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday May 27 to Friday May 31, 2024
Total Upgrades: 5
Total Downgrades: 6
Net Ratings Breakdown: Buy 55.93%; Hold 34.50%; Sell 9.57%

For the week ending Friday May 31, 2024, FNArena recorded five ratings upgrades and four downgrades for ASX-listed companies by brokers monitored daily.

The tables below show percentage upgrades by brokers to average earnings forecasts were slightly larger than downgrades, while falls in average target prices were a little larger than rises.

The average target for perennial outperformer Pro Medicus increased by 12% following the signing of five new customer contracts in North America with a combined minimum value of $45m per year, prompting Bell Potter to upgrade its rating to Hold from Sell and raise its 12-month target to $115 from $75.

The drivers of demand for the Visage product remain firmly in place, according to the broker, including declining reimbursement for radiology, too few radiologists and a sector requirement for improved productivity.

Total contract value for FY24 now rises to $245m, highlighting the strength of the company’s 'Full Stack' product offering and trend towards cloud deployment, noted Outperform-rated Macquarie.

The average target price for Pro Medicus of five covering brokers is now $88.40. Should Ord Minnet’s/Morningstar’s unchanged $34.50 target be excluded, the average rises to $101.88, which is still more than -20% shy of the current share price.

Last week, Ord Minnett/Morningstar felt the current PE multiple is unjustifiable given potential for earnings volatility, and the significant competitive threat posed by rivals such as Intelerad, Sectra, and Change Healthcare. Morningstar has been preaching on a near deserted island thus far.

On the flipside, there were material falls in average target prices for Peter Warren Automotive, Serko, and Lendlease Group.

Peter Warren Automotive received two ratings downgrades from separate brokers last week after issuing a disappointing trading update.

Citi downgraded to Sell from Neutral and lowered the target to $1.70 from $2.40 after being surprised by the magnitude of the earnings decline evident in the market update.

The analysts noted second half gross margins had likely contracted by around -110bps, all driven by discounting on new cars, and anticipated a "dreary" outlook for the dealership industry.

Should consumer demand soften further, given the lag between OEMs reducing production orders and current volume estimates, the broker could see further downside risks.

Ord Minnett felt the weakness was unsurprising because of some of the recent announcements from competitors.

Given near-term margin uncertainty, this broker downgraded to Hold from Buy and reduced its target to $1.95 from $3.30.

Serko experienced a significant improvement in free cash flow in FY24, and narrowed the EBITDA loss to -NZ$7.1m in FY24 from -NZ$32.6m in FY23 due to the incremental impact of the Booking.com deal, explained Ord Minnett. 

However, management pointed to a short-term slowing in revenue from this deal resulting in revenue guidance for FY25 of between NZ$88-$92m compared to the broker’s NZ$106m forecast.

On a positive note, Serko has not assumed much contribution from new strategic partnerships and the contribution from redirected traffic from the Booking.com leisure site, which Citi noted is not within management’s control. Both factors are expected to be positive contributors to FY26 revenue.

Lendlease Group outlined plans at its strategy day to sell most of the international business and refocus upon Australia. The group will exit its offshore Construction and Development business, but will retain investments in the US, Europe and Asia.

For more detail on these changes and potential for capital management please refer to https://fnarena.com/index.php/2024/05/30/lendlease-bringing-it-back-home/

Capitol health, which operates 67 diagnostic imaging clinics around Australia, heads up the earnings upgrade table below, just above Serko. The large percentage increase is largely due to the small forecast numbers involved.

A new analyst at Bell Potter increased revenue estimates for Capitol, due to normalising volume and pricing growth rates across diagnostic services and benefits, though inflationary pressures are expected to dampen the recovery in operating margins.

This broker forecasts rolling earnings will grow by 50% over two years (starting from a low point).

Fisher & Paykel Heealthcare is next with a nearly 31% rise in average earnings forecasts by brokers.

FY24 results were stronger-than-expected by Ord Minnett driven by higher revenue, good cost control and a better-than-expected gross margin expansion.

The company achieved a gross profit margin of 61.1% (excluding the provision of a product recall) compared to 59.3% for FY23, due to lower freight costs, manufacturing efficiencies and pricing, explained Morgan Stanley. First time FY25 guidance implied 8% upside to the broker’s current forecast.

Macquarie highlighted a favourable growth outlook but noted margin expansion was already captured within the current share price and retained a Neutral rating.

Xero announced price increases in the UK, and also put through packaging changes similar to the changes made in Australia. While the latter were already included in Citi's forecasts, the broker sees potential upside to consensus estimates.

For a summary of the prior week’s FY24 results and the outlook for Xero the reader may refer to https://fnarena.com/index.php/2024/05/28/xeros-growing-cash-balance-in-focus/.

In terms of earnings downgrades, here Paladin Energy was the “leader” with an around -38% fall in average FY24 earnings forecasts by brokers. Again, only small forecast numbers were involved which exaggerate any percentage move.

The Bell Potter analyst attended the Langer Heinrich mine site and came away "surprised" at the quality of the site, infrastructure and the workforce.

The mine restart is proceeding well and could generate upside potential to earnings estimates, noted the broker. The rating was downgraded to Hold from Buy after recent strength in share price.

Outperform-rated Macquarie suggested exploration upside could extend the mining phase and maintain the 6mlb per annum run-rate for longer than the current seven-year period.

Mineral Resources is next after Ord Minnett lowered earnings forecasts but maintained its $67 target price as current earnings drivers are considered short-term in nature.

The analyst reminded investors volatility in iron ore and lithium prices, as well as low-margin iron ore operations, makes for wild and uncertain swings in profitability.

The Reject Shop and Nufarm also received earnings downgrades from brokers.

Following a trading update, Morgan Stanley lowered its target for The Reject Shop to $3.70 from $4.75 as gross margin pressure and cost-of-doing-business (CODB) weigh, despite ongoing improvement for customer count and units per basket.

The higher CODB is due to ongoing inflationary pressures in labour costs and higher shrinkage, noted Ord Minnett.

Sales growth has moderated to 4.1% in the second half so far, after tracking at 4.8% at the start of the half. Management guided for FY24 group EBIT in the range of $4.0-5.5m, which implies a shortfall of -$2.3m-$3.8m against consensus forecasts, according to the Morgans analyst.

There is negative earnings momentum and clear pressures in terms of mix, shrinkage and cost inflation, and Morgan Stanley suggested inflationary pressures will be hard to offset.

Nufarm's first half result materially missed consensus estimates, noted Morgans, and the midpoint of management's new FY24 underlying earnings guidance also missed the consensus forecast by -15%.

Management is anticipating a return to growth in the second half with the mid-point of guidance implying to the broker second half earnings will be up 25% on the previous corresponding period.

Attaining management's unchanged revenue growth aspiration of between $4.4-4.6bn in FY26 appears challenging to Morgans.

Total Buy ratings in the database comprise 55.90% of the total, versus 34.54% on Neutral/Hold, while Sell ratings account for the remaining 9.56%.

Upgrade

A2 MILK COMPANY LIMITED ((A2M)) Buy by Citi .B/H/S: 3/3/0

Post assessing the latest New Zealand (NZ) port data in relation to a2 Milk Co, the Citi analyst confirms management is performing well against a challenging macro backdrop.

The analyst highlights NZ infant milk formula exports fell -11% in the January to April 2024 period compared to 28% growth in the 1H24, which is attributed to the company stocking channels with the company's new China label and the comparision of results in the previous corresponding period.

Citi highlights the potential market share gains from new product developments in the English label which reported growth in volumes to Hong Kong of 145% over the four-month period.

The supply chain partnership with Yashili is seen as a positive step that may lead to broader collaborations. Buy rating and $7.85 target price.

DATA#3 LIMITED. ((DTL)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 1/2/0

Morgan Stanley considers the current valuation for Data#3 is more compelling after a -25% share price retracement from all time highs, and upgrades its rating to Overweight from Equal-weight. The target rises to $8.40 from $8.10. Industry view: In-Line.

Growth should be supported by Services strength (in particular Managed Services) and resilient end customer exposures, to say nothing of medium-term tailwinds from AI, point out the analysts.

The company's government/enterprise end market exposures should prove more resilient relative to the SME market, which is starting to experience incremental uncertainty, according to the broker.

HMC CAPITAL LIMITED ((HMC)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/4/0

Macquarie raises its target for HMC Capital to $7.97 from $6.96 and upgrades the rating to Outperform from Neutral.

These changes follow the acquisition of Payton Capital, a private credit manager, alongside a $100m institutional placement and $30m shareholder purchase plan.

The acquisition increases assets under management (AUM) to $12.5bn, with management reaffirming its $20bn medium-term target.

The broker believes the transaction will be around 7% accretive to operating EPS, and sees material upside if management executes on its growth ambitions in the credit segment.

PRO MEDICUS LIMITED ((PME)) Upgrade to Hold from Sell by Bell Potter .B/H/S: 1/2/2

While  Bell Potter continues to struggle with the valuation ascribed to Pro Medicus, the analyst acknowledges the recent announcement of five new clients, adding $45m in revenue over eight years, enhances the company's revenue visibility for FY25.

Full revenue realisation from these contracts is anticipated in the 2H25, with the broker noting consensus FY25 revenue estimates are in a tight range around $200m, representing 25% growth on FY24.

The target price is raised to $115 from $75 and rating upgraded to Hold from Sell.

LOTTERY CORPORATION LIMITED ((TLC)) Add by Morgans .B/H/S: 2/4/0

Morgans highlight the strength in the lottery markets over the 1H2024, with 12 large jackpots over $15m against 7 in the previous corresponding period, including this past weeks $150m Powerball draw and the $40m Oz Lotto draw.

Accordingly, the broker has adjusted the large jackpot forecast for both Lottery Corp and Jumbo Interactive ((JINN) to 60 from 48 in FY2024.

The analyst upgrades EPS forecasts for Lottery Corp by 9.7% in FY24 and reduces by -1.1% for FY25 to account for the strong jackpot backdrop.

The target is raised to $5.60 from $5.40 with an Add rating.

Downgrade

CROMWELL PROPERTY GROUP ((CMW)) Accumulate by Ord Minnett .B/H/S: 1/1/0

Ord Minnett assesses the unexpected recent sale of the European fund management platform and associated assets of Cromwell Property.

The broker views the sales as far from ideal given that markets are under pressure, but stresses the strategic move is expected to streamline operations and improve the overall financial position of the group with gearing moving to 25% by the September quarter. 

Post the sales, Ord Minnett notes the business should be more predictable as an Australian business with the financial strength improved.

Accumulate rating. The target falls to 66c from 75c.

KEYPATH EDUCATION INTERNATIONAL INC ((KED)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/1/0

Macquarie increases its target to 87c from 67c to align with the merger agreement offer price (they always call it a 'merger', don't they) for Keypath Education International from Sterling Partners, which already held a 66% stake in the company.

The rating is downgraded to Neutral from Outperform.

Separately, management at Keypath upgraded FY24 revenue guidance to US$137-139m from the upper end of US$130-135m.

PALADIN ENERGY LIMITED ((PDN)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 4/1/0

The Bell Potter analyst attended the Paladin Energy Langer Heinrich mine and came away "surprised" at the quality of the site, infrastructure and the workforce.

The mine restart is proceeding well and could generate upside potential to earnings estimates, although Bell Potter points to potential higher operating costs, up 5% from inflation, as a moderating factor.

Rating downgraded to Hold from Buy due to the strong share price performance. Target lowered to $15.70 from $16.50.

PETER WARREN AUTOMOTIVE HOLDINGS LIMITED ((PWR)) Downgrade to Hold from Buy by Ord Minnett and Downgrade to Sell from Neutral by Citi .B/H/S: 1/2/1

Ord Minnett assesses the recent trading update from Peter Warren Automotive as weaker than expected, with new car margins being crimped due to improved supply and lower demand.

The analyst notes the weakness is unsurprising given some of the recent announcements from competitors.

Management points to revenue holding up, but lower margins underpin a decrease in profit before tax guidance of $52-57m for FY24.

The broker highlights this implies a significant reduction in margins, with 2H2024 profit before tax expected to fall to a $20m mid-point.

The earnings estimates are downgraded substantially. The rating is downgraded to Hold from Buy with the target price reduced to $1.95 from $3.30.

Citi downgrades its rating for Peter Warren Automotive to Sell from Neutral and lowers the target to $1.70 from $2.40 after being surprised by the magnitude of the earnings decline evident in yesterday's trading update.

The analysts believe 2H gross margins have contracted by around -110bps, all driven by discounting on new cars, and see a "dreary" outlook for the dealership industry.

Should consumer demand soften further, given the lag between OEMs reducing production orders and current volume estimates, the broker sees further downside risks.

SMARTPAY HOLDINGS LIMITED ((SMP)) Downgrade to Hold from Buy by Bell Potter .B/H/S: 1/1/0

Bell Potter saw how SmartPay's FY24 earnings result met expectations.

Revenue growth of 24.1% year-on-year was viewed as "soft" but offset by a lower cost base, which declined to 34.8% of revenues against 38.2% in FY23.

The broker highlights considerably weaker free cashflows from internal software development, hardware inventories and other network infrastructure spend ahead of the 3G shutdown.

The higher churn rate is a surprise to Bell Potter and the broker lowers the FY25 EPS forecast by -29%.

Rating downgraded to a Hold from Buy and the target price lowered to $1.30 from $1.76.

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 A2 MILK COMPANY LIMITED Buy Neutral Citi 2 DATA#3 LIMITED. Buy Neutral Morgan Stanley 3 HMC CAPITAL LIMITED Buy Neutral Macquarie 4 LOTTERY CORPORATION LIMITED Buy Neutral Morgans 5 PRO MEDICUS LIMITED Neutral Sell Bell Potter Downgrade 6 CROMWELL PROPERTY GROUP Buy Buy Ord Minnett 7 KEYPATH EDUCATION INTERNATIONAL INC Neutral Buy Macquarie 8 PALADIN ENERGY LIMITED Neutral Buy Bell Potter 9 PETER WARREN AUTOMOTIVE HOLDINGS LIMITED Sell Neutral Citi 10 PETER WARREN AUTOMOTIVE HOLDINGS LIMITED Neutral Buy Ord Minnett 11 SMARTPAY HOLDINGS LIMITED Neutral Buy Bell Potter

Target Price

Positive Change Covered by at least 3 Brokers Order Symbol Company New Target Previous Target Change Recs 1 PME PRO MEDICUS LIMITED 88.400 78.900 12.04% 5 2 A2M A2 MILK COMPANY LIMITED 6.540 6.120 6.86% 6 3 LYC LYNAS RARE EARTHS LIMITED 6.683 6.350 5.24% 6 4 FPH FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED 23.055 22.095 4.34% 5 5 HMC HMC CAPITAL LIMITED 7.324 7.062 3.71% 5 6 AD8 AUDINATE GROUP LIMITED 20.720 20.150 2.83% 5 7 XRO XERO LIMITED 140.817 138.575 1.62% 6 8 QUB QUBE HOLDINGS LIMITED 3.913 3.860 1.37% 4 9 DTL DATA#3 LIMITED. 8.133 8.033 1.24% 3 10 SDF STEADFAST GROUP LIMITED 6.450 6.375 1.18% 4

Negative Change Covered by at least 3 Brokers Order Symbol Company New Target Previous Target Change Recs 1 PWR PETER WARREN AUTOMOTIVE HOLDINGS LIMITED 2.288 2.900 -21.10% 4 2 SKO SERKO LIMITED 4.125 5.175 -20.29% 3 3 LLC LENDLEASE GROUP 7.117 8.563 -16.89% 3 4 TRS REJECT SHOP LIMITED 4.183 4.533 -7.72% 3 5 DMP DOMINO'S PIZZA ENTERPRISES LIMITED 47.250 49.917 -5.34% 6 6 CAJ CAPITOL HEALTH LIMITED 0.310 0.320 -3.13% 3 7 DEG DE GREY MINING LIMITED 1.737 1.783 -2.58% 3 8 CTD CORPORATE TRAVEL MANAGEMENT LIMITED 18.576 18.914 -1.79% 8 9 MGR MIRVAC GROUP 2.426 2.466 -1.62% 5 10 CKF COLLINS FOODS LIMITED 12.125 12.275 -1.22% 6

Earnings Forecast

Positive Change Covered by at least 3 Brokers Order Symbol Company New EF Previous EF Change Recs 1 CAJ CAPITOL HEALTH LIMITED 23.667 1.000 2266.70% 3 2 SKO SERKO LIMITED -1.710 -9.473 81.95% 3 3 FPH FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED 53.146 40.686 30.62% 5 4 XRO XERO LIMITED 139.038 120.399 15.48% 6 5 SFR SANDFIRE RESOURCES LIMITED -1.523 -1.676 9.13% 6 6 COE COOPER ENERGY LIMITED 0.633 0.600 5.50% 3 7 TLC LOTTERY CORPORATION LIMITED 17.550 16.950 3.54% 6 8 RWC RELIANCE WORLDWIDE CORP. LIMITED 27.453 26.674 2.92% 6 9 PME PRO MEDICUS LIMITED 75.050 73.700 1.83% 5 10 CIP CENTURIA INDUSTRIAL REIT 17.350 17.100 1.46% 6

Negative Change Covered by at least 3 Brokers Order Symbol Company New EF Previous EF Change Recs 1 PDN PALADIN ENERGY LIMITED -4.695 -3.413 -37.56% 5 2 MIN MINERAL RESOURCES LIMITED 118.971 144.886 -17.89% 7 3 TRS REJECT SHOP LIMITED 13.633 15.967 -14.62% 3 4 NUF NUFARM LIMITED 15.543 17.700 -12.19% 7 5 IMD IMDEX LIMITED 10.450 10.725 -2.56% 4 6 DMP DOMINO'S PIZZA ENTERPRISES LIMITED 135.150 137.483 -1.70% 6 7 SUN SUNCORP GROUP LIMITED 104.367 106.033 -1.57% 6 8 CKF COLLINS FOODS LIMITED 51.133 51.600 -0.91% 6 9 HMC HMC CAPITAL LIMITED 32.480 32.740 -0.79% 5 10 BEN BENDIGO & ADELAIDE BANK LIMITED 88.900 89.125 -0.25% 5

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